The postal union dilemma: Shrink to survive or corporatize

First the context: Postal Service news continues to be grim. The USPS lost another $1.3 billion for the first quarter of its 2013 fiscal year, on top of the $16 billion lost in its 2012 fiscal year. The Postal Service’s core business – the delivery of first-class letter mail – was down by 4.5 percent relative to the same quarter in 2012. Though standard mail was up 3.6 percent, fueled by the fall elections, and parcels were up 4 percent, the numbers are worse than they appear at first, since first-class mail is by far the Postal Service’s most profitable business.

These trends suggest that the justification for the Postal Service’s current structure as a government-owned firm with legally enforced monopolies (one over letter delivery and the other over the use of the mailbox) is weakening. That structure was designed to use profits from low-cost (typically urban) mail routes to help pay the cost of delivery to high-cost (typically rural) routes, and was intended to guarantee the delivery of letters, rather than parcels or advertisements. Indeed, the USPS faces intense competition in parcel, overnight, and in other services not covered by the delivery monopoly.

The steep decline of letter mail suggests that the Postal Service’s monopolies should be phased out. Legally enforced monopoly is always – and for solid policy reasons – accompanied by regulatory oversight that constrains the firm’s ability to innovate in raising additional revenue. That is, the USPS can never become a true enterprise because it is prohibited from being enterprising.

With the monopolies in place, the Postal Service will be largely consigned to a “shrink to survive”, cost-cutting strategy.

Any benefits the mail monopolies have provided in the past are now greatly reduced. First, letter mail delivery itself is becoming less important as electronic communication becomes more popular, so the social benefits of ensuring delivery are smaller. Second, because of decreasing mail volume, the profits once generated by the monopolies to help ensure rural delivery are today greatly diminished.

Meanwhile, the social cost from hampering postal operations with monopoly-related regulations is rising. In the face of growing threats from electronic alternatives, the harm from a regulatory straightjacket increases over time. This may explain why all 27 European Union member countries eliminated their postal monopolies in a wave of postal liberalization, as have many other countries.

Given that about 80 percent of the Postal Service’s costs are labor-related, no group should be more concerned about a shrink-to-survive strategy than organized labor. There is simply no way to downsize in the face of declining mail volumes that does not involve continued, large reductions in the work force.

Labor is thus the key group that should be pushing for monopoly phase-out. Without it, the Postal Service will never enjoy the commercial flexibility necessary to use its existing assets to generate more revenue, and to therefore avoid faster downsizing. If the monopolies were phased out, the Service would be freed up to innovate in pricing, in new products and services, and in new partnerships with the private sector.

So far, however, organized labor has shown little interest in postal liberalization by phasing out the monopolies. Perhaps that is because the link between the regulation of monopoly and the freedom to generate more revenue remains under-appreciated. Hopefully an outright collapse of the Postal Service will not be required to draw attention to that crucial link.

Geddes is a visiting scholar at the American Enterprise Institute and an Associate Professor at Cornell University.